15^TH April 2005

Good afternoon everybody and thank you for the invitation to be here with you today. I must first of all congratulate you on your choice of location for your Business Lunch! What better location could you choose than the European City of Culture for 2005.

Today, I want to address some important issues concerning the recent success of, and future challenges facing, the Irish economy, in particular the continuing importance of Foreign Direct Investment, Ireland's future enterprise policy outlook and the challenges facing by the European Union in implementing the Lisbon Strategy.

Any analysis of the Irish economy and its recent success must start with a recognition of our openness to global markets and influences. According to the A.T. Kearney Globalisation Index, Ireland is the world's most global country as measured by its levels of political, economic and technological integration, when compared with 61 other countries representing 85% of the world's population. This provides us with enormous opportunities but also exposes us to major threats. It is because of this openness that we are acutely aware of the need remain competitive in world markets and to continually review and adjust our policy to reflect changing circumstances.

We must not forget that, in the not so distant past, our economy seriously under-performed, at least in part because of inappropriate policies. The policy shifts effected in the late 1980s and early 1990s released the potential of the economy and led to a period of extraordinary growth during which the Irish economy has been the fastest growing in Europe. Employment grew by 50% over the last decade or so while unemployment has been reduced from 16-17% in the early 1990s to its current level of about 4.5%. Enforced emigration, such a depressing reality for so long in the past, no longer faces our people. Instead, we now attract significant numbers of immigrants who make a vital contribution to maintaining the momentum of economic growth.

Irish enterprise has made huge strides during this period. Many of our companies have established a strong presence in international markets as reflected in the ten-fold increase in outward investment during the 1990s. (It sometimes surprises people to learn that the number of people employed by Irish companies in the United States is not far short of the number employed by American companies in Ireland.) Irish companies out-performed their counterparts in other EU Member States in both output and employment in most sectors during this period. Growth was particularly impressive in the type of sectors on which we must rely in the future such as electronics, pharmaceuticals, medical devices, software and financial services.

However, it must be accepted that the driving force behind the spectacular growth of recent times has been foreign direct investment.

There are now some 1,000 overseas companies directly employing 130,000 people in Ireland. These companies and their employees account for three-quarters of manufacturing output, nine-tenths of manufacturing and services exports and around half of total employment in manufacturing and international services.

These companies have come from all over the world but the US is, and has been, the largest single source of investment by far as illustrated by the following facts:

• Nearly one-third of all manufacturing inward investment in Ireland originates from the US.
• Nearly half of all US software investment locates in Ireland.
• Over 60% of all R&D centres established in Ireland emanate from US companies.
• Three quarters of all customer contact centres in Ireland emanate from US companies.
• Over 60% of shared services projects emanate from US companies.
• The majority of ICT and Pharmaceutical/Medical Technologies investments in Ireland originate from US companies.

Ireland's success in attracting investment cannot be attributed to any one factor but rather to a combination of factors which have created a highly competitive environment in which foreign companies operate successfully and profitably.

We have consistently demonstrated our flexibility and agility to adapt and respond. For example, the continued heavy investment in education by Government creates and maintains a pool of highly skilled young people, which delivers a highly skilled labour force, with a strong focus on business relevant skills, and has the capacity to embrace change, retain flexibility, and promote knowledge-intensive economic activity into the future. This is why Ireland's educational system is ranked 5th in the world in the way it meets the needs of a competitive economy . It also helps to explain why Ireland is ranked 4th in the world on overall productivity and in labour productivity per person employed per hour, in the Institute for Management Development World Competitiveness Report 2004.

Our forward strategy in winning new inward investment is to continue to build on the business sectors that operate so successfully out of Ireland at present and also to ensure that Ireland takes advantage of new opportunities emerging in the global inward investment markets. To support the development of the foreign companies already established in Ireland, IDA has specific programmes which are designed to improve performance, widen the range of business functions and generally move business activity up the value chain.

We are also striving to ensure that all regions have the infrastructure and the centres of attraction to secure the best foreign investment, particularly in the framework of the National Spatial Strategy. In this context, the current National Development Plan (2000-2006), is spending heavily on infrastructure development across a range of areas, with the objective of making Ireland's infrastructure a key attribute in terms of both modernity, quality and capacity. In Cork, the major development of the airport and the ongoing and planned road projects are good examples in this regard.

Nevertheless, I recognise that enterprise policy up to now has largely been built on the synergies delivered by a plentiful supply of good quality workers, a relatively low cost base and a favourable taxation regime. These factors have served us well in the past. They will not, however, be sufficient to sustain our growth trajectory against the type of global competition we see ahead. Labour supply is no longer in surplus, while wage levels and other cost have also risen and other countries have become more competitive in relation to taxation. In effect the overall competitive package that Ireland has offered over the last decade needs some review and renewal.

New foundations will be needed for enterprise policy if Ireland is to address these challenges. Conditions that will support a sustained shift to higher skill, higher value, and more knowledge-intensive activities need to be created. This will not be achieved easily or automatically, but it is a task that cannot be deferred.

The Report of the Enterprise Strategy Group recognises that we are at a turning point in terms of the competitive impact of global competition for markets and investments. The Group identified five key areas in which it believes Ireland can establish sustainable competitive advantage. In the Group's view we must

• develop an expertise in international markets so that business can be more responsive to the needs of customers;
• build a world-class research and innovation capability to support the development of high-quality, high value products and services;
• renew Ireland's historic commitment to education and training to provide the skills base industry will need;
• maintain a competitive tax environment to drive economic growth;
• provide capable and flexible Government that can quickly identify policies required by enterprise.

We have to recognise the real importance of the ESG's recommendations lies in the capacity it will give us to quickly act against emerging threats to business and to exploit the new opportunities being presented by technological developments and business internationalisation.

The past has been driven by a strong manufacturing sector underpinned by significant overseas investment. Tomorrow's prosperity will be driven by technology and creative ingenuity built into both products and services. But critically, existing weaknesses and failings in terms of innovation, R&D and depth of market knowledge demonstrate that we cannot hope to succeed in the future if past successes make us complacent.

I firmly believe that creating a continuous positive loop between innovation and market knowledge will be the key competitive advantage firms have to acquire, even to survive. Innovation will prove commercially successful if it is genuinely customer driven. Commercial success in turn leads to stronger profitability and a stronger enterprise base across the country.

Equally policymakers must be agile and responsive to new global business imperatives. If we don't make sure the right supports and environment is in place for enterprises to do profitable business from Ireland, our competitors will. To make sure this happens I recently launched an Action Plan to deliver on the Enterprise Strategy Group's recommendations. My approach also involves bringing together senior representatives from enterprise and the Secretaries General of relevant Government Departments to advise me on progress in the implementation of the ESG policy prescriptions. This will form the basis of a twice yearly report that I will make to Cabinet on the pace and momentum of policy changes to help enterprise do more business, more profitably from Ireland.

I'm pleased that significant progress is being made in the vital arena of Technology and R&D. We have set up a Cabinet subcommittee on Science, Technology and Innovation that I chair and recently published the R&D Action Plan to propel more investment and greater commercial investment in research, innovation and product development. I would like to mention just one small area where we intend encouraging substantial change and have the plans to do so. In 2001, just 19 foreign affiliates accounted for two thirds of all R&D performed by foreign firms here. By 2010, the number of foreign companies performing significant levels of R&D - in excess of €2 million - should increase from 47 in 2001 to 150 by 2010. The changes that have to take place across the research landscape should not be taken lightly but neither should our commitment to make sure it happens.

A critical factor in Irish economic development has been membership of the EU and the effective exploitation of the opportunities afforded us by access to that huge market. In the thirty years since joining the then European Economic Community, total Irish trade in goods jumped from €1.65 billion to over €135 billion. This reflects an average annual increase of 15%. The destination of exports has also been dramatically transformed, with the European Union now accounting for over 60% of the total. As a consequence, there is now a greater balance in our trading pattern than previously. Entrepreneurship is alive and well in Ireland with one in every twelve adults involved in business activity. This is the highest level in the EU.

The EU will remain central to our economic development in the future and an important debate is going on in Europe at present. Some years ago, to address Europe's dual challenges of stagnating growth and increasing unemployment rates, the Heads of State and Government signed up to an ambitious programme of change which has become known as the Lisbon Strategy. We committed ourselves to making the EU the most competitive and dynamic knowledge based economy in the world by 2010. To date, progress in relation to the implementation of the Lisbon Strategy has been at best mixed.

The challenges we face today at EU level are even more urgent in the face of an ageing population and increased global competition. It is clear that the Lisbon Strategy is not achieving its goals, as average unemployment in the EU25 today is approximately 9%, amounting to some 18 million people, compared with 5.2% in the US. The average growth of the Euro area in 2004 was a meagre 2.2%, while the US economy grew by 4.3%, Japan by 4.4% and China by 9%. If current trends continue the potential growth of the European economy will halve over the coming decades and reach just over 1% per year. Ireland, I am pleased to record, is one of the exceptions among EU Members with the lowest unemployment and predicted by economists and the European Commission to achieve one of the highest growth rates in the Union this year.

However, five years on from the initial Lisbon Programme, we have reached something of a crossroads. The renewed Lisbon Strategy set out by the European Commission in its mid-term review report in February this year is a refreshing change. It is more focused, more action orientated. It has a clear and simple message: more growth and more jobs. Heads of State or Government of the EU endorsed the Commission's message at their Spring European Council meeting last month.

Ireland very much welcomes the new approach, with the central focus on growth and jobs, to achieve the Lisbon objectives. There is a need for concerted action by all Member States to ensure that the full potential of the EU in terms of growth and employment can be realised. The Irish experience of recent years has been that higher growth rates create the best platform for promoting greater social cohesion. If we do not succeed in improving our growth rates, we will not create the conditions to enable us to build a successful society along with development that is socially and environmentally sustainable.

Indeed, Ireland's experience of membership of the EU has by any standards been a model of economic and social progression. We enjoy living standards as measured by gross domestic product (GDP) and gross national product (GNP) per capita which exceed the EU average. Innovation has replaced emigration. From sandwiches to software, new business activity can be seen in every region in Ireland. The performance of Irish business continues to strengthen even in the face of the recent adverse global trading conditions.

Better regulation is also a must for an efficient and dynamic economy. Competing in the global market place requires a regulatory structure that is flexible, efficient, helps businesses and builds consumer confidence. Applying a competitiveness test in the Impact Assessment process was one of our initiatives during the Irish Presidency of the EU last year. It will now be an integral part of EU decision-making. Furthermore, the EU will review the cumulative burden of regulation, better assess the effectiveness of new legislation and draw on outside expertise to improve its impact assessments. These are very important developments which will not only reduce the red tape burden but better position our firms to compete in world markets. These are initiatives which I know will be welcomed by business.

Perhaps the biggest issue facing the EU in the coming twelve to eighteen months is the proposed Constitution. Referenda will be held in a number of countries, including Ireland. I look forward to the debate and to the opportunity for reflective discussion of what the EU means for Ireland, our role in the EU and the Union's role in global affairs. This new Constitution is an extremely important development. It brings together in a straightforward structure the values and principles of the Union together with the rules and competences of the Union. It also provides for an enhanced role for national parliaments in the EU legislative process. All new proposals from the EU Commission will have to be transmitted to national parliaments and the latter will be able to trigger a review of the proposal by the Commission, the so-called "yellow card", if it is deemed by at least a third of national parliaments not to be in conformity with the principle of subsidiarity (under which action should not be taken at EU level unless it is more effective than action taken at national or regional level).

So, the message is simple. There is no room to rest on our laurels, notwithstanding our success in recent years. Major challenges face us both in the domestic policy environment and in the wider EU context. In facing those challenges, I can assure you that it is the Government's intention to continue to be flexible and agile in responding to business needs for both existing companies located in Ireland and those yet to arrive here. Past successes have confirmed the importance for business of that flexibility and of a favourable corporate taxation regime and we fully intend to retain this environment in the future.

Thank you very much.

(Copy of this Press Release also available on the Departments website at www.djei.ie)

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